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EU's VAT fraud system is too weak, say auditors

The current EU system for fighting VAT-related fraud is ineffective and hampered by a lack of data, the European Court of Auditors (ECA) has said.04 Mar 2016

The tools available to fight intra-community VAT fraud need to be strengthened and more consistently applied, the ECA said. This will require action by member states, the European Parliament and the European Commission, it said.

"VAT fraud is often linked with organised crime. According to Europol, €40-60 billion of the annual VAT revenue losses of member states are caused by organised crime groups. Because exports of goods and services from one EU member state to another are exempt from VAT, criminals can fraudulently evade taxes in both countries," the ECA said.

After visits to the United Kingdom, Germany, Italy, Hungary and Latvia, the ECA found that there are no effective cross checks between customs and tax data in most of these countries. While VAT information is shared between member states' tax authorities, there are problems with the accuracy, completeness and timing of that data, it said.

The ECA also found a lack of cooperation and an overlap of powers between different authorities within member states.

Neither Europol nor OLAF, the EU's anti-fraud office, can access data from member states’ anti-fraud network or from the VAT information exchange, it said.

The ECA therefore proposes that the European Commission should work with member states to improve the speed of replies to information results, and the reliability of the VAT information exchange system. The Commission should also set up a common system to collect statistics on fraud, and encourage member states to better coordinate their policies on 'reverse charges', where customers rather than suppliers have to account for VAT.

The European Council should approve a Commission proposal on the joint and several liability of suppliers for VAT losses in the member state of destination and authorise the Commission to negotiate and sign mutual assistance arrangements with the countries where most digital service providers are established, the ECA said.

The European Parliament and the Council should also include VAT within a directive on the fight against fraud and the European Public Prosecutor’s Office Regulation, and grant OLAF powers and tools to investigate intra-community VAT fraud, the ECA said.

Tax expert Darren Mellor-Clark of Pinsent Masons, the law firm behind, said: "The fight against VAT fraud has been a stated priority of the EU for a number of years. The report is therefore disappointing news that there appears to be systemic failure to effectively combat fraud on either a legislative and operational basis. This failure is concerning as it exposes member states’ already stretched finances to further loss, with impact on provision of services."

"Further, the failure to eliminate such fraud exposes legitimate businesses to cost as tax authorities seek to recoup loss by application of the Kittel principles along the supply chain, denying business the ability to recover VAT incurred on transactions," he said.

Under the Kittel principle, HMRC says that a business knew or should have known that the transactions in which it was involved were fraudulent, and that the business failed to take sufficient care to ensure the bona fides of its counterparties and suppliers.

The UK’s HM Revenue and Customs (HMRC) said last month that it will change how telecoms operators are taxed in a bid to prevent fraud, by making VAT on wholesale telecommunications services the responsibility of the customer rather than the supplier.

This change to a reverse charge accounting mechanism has been brought in to prevent what is called missing trader intra-community (MTIC) fraud, the tax body said. MTIC fraud involves criminals buying goods or services in another EU state, thereby not paying UK VAT, and selling it on with UK VAT added. They then do not pay that tax to the tax authority, but go 'missing' with the money.